Economic resilience following the pandemic, coupled with over $4.6 trillion of federal COVID-19 aid led to strong state fiscal conditions and gave rise to an era of unprecedented state tax relief. Property tax reform, income tax cuts, tax benefits for families and children, tax incentives for businesses and sales tax exemptions across the country contributed to slow revenue growth in 40 states in FY 2024. However, the rate of tax cuts is decreasing as states expect to return to more typical budget conditions.
Funding Challenges Ahead for Roads and Schools
Tax revenues and federal funds are decreasing and, at the same time, policymakers are facing issues that will impact state spending. Two pressing funding challenges are transportation and education.
Transportation: The U.S. population has nearly doubled since the golden age of infrastructure in the mid-20th century. To keep up with demand, states must not only fund new transportation projects but also pay the costs of repairing and maintaining aging infrastructure. States are now entering the golden age of deferred maintenance.
To make matters more complicated, gas tax revenues, the main source of transportation funding, are declining. As consumers transfer to more fuel-efficient cars and electric vehicles, states are diversifying methods of funding transportation. At least 39 states now charge fees for electric vehicles to recover lost transportation revenue. Road usage charges, which drivers pay based on distance driven, are also gaining traction. Hawaii, Michigan, Vermont, Virginia and Washington all enacted legislation related to road usage charges in 2023. Moreover, at least seven states passed legislation related to taxing users of public charging stations.
Public school funding: In 2021, states funded 46% of total spending for elementary and secondary education. States received increased support during the pandemic after the federal government enacted three relief bills that transferred around $190 billion to the Elementary and Secondary School Emergency Relief Fund. Now, with the expiration of federal dollars and decreases in revenue, states are rethinking their approaches to education funding.
Another factor states are considering are enrollment rates, which are directly tied to school funding. In some places, demographic shifts are projected to decrease enrollment rates. The expansion of private school choice policies can also contribute to lower public enrollment rates. In 2023, all 50 states and at least three territories proposed bills on education choice. Consequently, several states are looking into updating public education funding formulas to help mitigate these budgetary challenges.
2024: The Year of AI
Artificial intelligence has popped up everywhere over the past year. In 2024, over 150 AI-related bills were introduced, ranging from oversight to procurement standards. State government operations are not immune, and lawmakers are also considering how the use of AI might fit into the budget process and fiscal policy. For example, a project with the Government Finance Officers Association and Rutgers University is examining how AI can be used to extract financial data from local government reports, to assess fee structures to prevent default and even to track infrastructure quality, allowing localities to invest more effectively.
Robust Reserves and Fiscal Data
Post-pandemic surpluses, driven by strong tax collections and federal funds, allowed states to build up rainy day funds, or budget stabilization funds, to use for one-time investments or to prepare for unexpected shortfalls. On average, in FY 2020, states could operate solely on rainy day funds for about 30 days. In FY 2024, the average number of days increased to 48. Robust reserves give lawmakers flexibility to close budget gaps as spending challenges constrain state budgets. While states can rely on their reserves in the short term, policymakers will still face tough decisions in their attempts to resolve long-term imbalances and develop more sustainable budgets.
Finally, the use of data in state fiscal policy is not just helpful but essential for informed decision-making. With new budgetary challenges on the horizon, policymakers need reliable tools to address societal needs effectively. Fiscal 50, by The Pew Charitable Trusts, consolidates accurate and up-to-date budget information in an interactive platform, providing the groundwork necessary for long-term fiscal stability. For more detailed information on these pressing fiscal policy topics, visit Pew’s debate series which outlines key issues state lawmakers are expected to face in 2025.